Economists Forecast the Following Inflation Rates for the Next Four $\begin{array}{ll}\text { Year } & \text { InflationRate } \\\hline 1 & 3 \% \\2 & 4 \% \\3 & 5 \% \\4 & 6 \%\end{array}$

question 48

Multiple Choice

Economists forecast the following inflation rates for the next four years $\begin{array}{ll}\text { Year } & \text { InflationRate } \\\hline 1 & 3 \% \\2 & 4 \% \\3 & 5 \% \\4 & 6 \%\end{array}$ What inflation adjustment should be included in the interest rate on a four-year loan made today?

• A) 3%, because that's the rate at the time the loan is made and borrowers won't pay any more
• B) 6%, because that's the rate that will exist when the loan is repaid and the lender can loan the money out again
• C) 4.5%, because that's the average expected inflation rate over the life of the loan
• D) at least 7%, because the lender needs to protect itself from unexpectedly high inflation rates